The Apple Tax – Is $15 Billion Fair?

Between Brock Turner’s release from jail and Kaepernick’s refusal to stand the EU Apple tax went under the radar for many people. It’s actually a fairly interesting case though! This “Apple tax” is to the tune of $15Billion dollars. Which is a fairly small portion of Apple’s oversea industries. They could pay this tax, repatriate all of their offshore earnings at 35%, and still have over $100 billion left over for dividends and investments. So the money isn’t the issue.

The issue is one of fairness and paying your share. To be fair, I don’t think news sources are doing this case justice. Those who are for the tax aren’t being considerate of the fact that Apple acted in good faith. Those who are against the tax aren’t taking into consideration the special treatment and tax evasion that Apple went through.

Personally, I refuse to buy Apple products. I think they’re morally perverse and I find their product quality versus their product pricing to be flawed. You pay more for less. However, the EU commission is going about this the wrong way. They’re trying to enforce a rule that doesn’t exist, for actions that preceded the current version of the EU.

The History Preceding the Apple Tax

In 1980 Apple founded their international headquarters (Apple Operations International) in Cork, Ireland. They chose Cork because, at the time, Cork was offering a 0% tax holiday for companies. This holiday was to last for 10 years. Well during that time, the EU was starting to come to life – creating rules and regulations to aid the trade of member nations. One of those rules though was no more tax holidays; however, they let Ireland’s expire naturally as arranged. This part isn’t too contested. Apple didn’t receive any preferential treatment because all companies received this tax holiday.

However, in 1990 as the tax holiday expired, Apple planned to remove their manufacturing from Ireland and transition to Singapore as they offered better tax and manufacturing incentives. Ireland, faced to lose about 1,000 jobs, offered Apple a new tax program, one that fit within the current iteration of EU rules. This was an Advance Purchase Agreement (APA) and is used for transfer pricing within a company. Transfer pricing is just the sale of goods or materials to another affiliate or subsidiary within the same company. In this case, Apple was selling their intellectual property to Apple Operations for a low fee, and the Apple operations was licensing that IP to other holding companies to manufacture and sell. Meanwhile, Apple Operations was raking in all the cash.

The Logic Behind the Apple Tax

So here’s where it gets convoluted, so bear with me. Apple is an American company headquartered and running operations out of Cupertino, California. Their affiliate, Apple Operations International, is an Irish company headquartered in Cork, Ireland and running business operations out of Cupertino, California. Apple Operations International has no office and only has a few employees.

Measuring the Apple Tax

Under American tax law, we tax international profits once they re-enter the country as revenue for their parent company. So long as the money never reaches America, it’s never taxed. Ireland taxes profits on companies who create revenue and operate out of the country. That means, Apple Operations who are based in Ireland but run out of Cupertino, CA aren’t eligible for taxation either. Furthermore, the holding companies that Apple Operations owns in Ireland generally are profit-neutral. This is by design. They way those Apple APA’s are set up, the revenues are just enough to cover their operational costs.

In a 2011 U.S. Senate investigation, they found that Apple International (as a collective whole) made $22Billion. Under the tax rules only $50Million was taxable. After deductions and expenses, Apple International paid just shy of $10Million in taxes. To break that down, Apple International had an effective tax of .005%. The most Ireland got taxed during 1991 and 2014 (in 2015 Apple restructured and lost their tax benefits) was 1%.

Because of the way Ireland viewed the corporate structure, which other companies could not benefit from, the EU commission viewed it as state aid. To be fair, this was a known loophole for Ireland; however, Ireland got rid of it pretty shortly after 1991. But, for fear of losing jobs, they allowed Apple to continue to operate under rules that didn’t exist anymore.

The Problems with the Apple Tax

The way it looks, I don’t see Apple getting out of this tax. That’s not just because they’re appealing to the EU commission that levied the tax. They definitely received tax treatment that was beneficial to Apple that other companies weren’t eligible for, therefore, it’s tantamount to state aid. However, Apple didn’t make Ireland sign the treaty.

All Apple did was dangle jobs in front of Ireland – which is their right. They also took advantage of tax laws created, and meant for, traditional manufacturing companies. Our tax code (and Ireland’s too) is just not sophisticated enough to keep up with billion-dollar technology companies with armies of lawyers and accountants. But again, that’s not Apple’s fault. Apple did what any company would do.

The real “villain” here is Ireland. They had the power to remove these protections in any year from 1992 to 2014. Yet, in 1994 and 2007 they reaffirmed the tax protections. Even though, by 2007, Apple barely manufactured any goods in Ireland and it was just a service based and sales industry – jobs that benefitted from being in a low-tax country with a highly educated population. Ireland was still the lowest taxing country; those jobs would not have left. Had Ireland stopped everything then, Apple would have been paying their Irish fair share. However, it should be noted, those funds would still be overseas in cash and asset holdings. The American government would still tax any repatriated funds.

Conclusion

I agree with the commission: Ireland gave state aid to Apple. However, even though Apple created a bunch of hollow holding companies to take advantage of tax loopholes, I still place more of the blame with the Irish government. Thus, while the Apple tax is $15Billion in taxes owed, the interest that the EU commission is also assigning should be exempted. Interest is only owed when it’s negligent refusal to pay. Apple wasn’t negligent, they were just acting in their best interest.

Apple still believes that the U.S. government is to blame for their offshore holdings. Their rationale is that they don’t use tax havens in the Caribbean. They also point to their taking on debt to do stock buybacks, rather than repatriate oversea earnings because the debt was cheaper. Fair enough…I suppose. They don’t use Caribbean tax havens, they just use a hollow holding company with no formal place of business and just a few C-Level executives as employees to skirt tax lines. Tim Cook insists it’s not a shell company, but it’s a shell company. As for the debt, that’s their prerogative. However, that’s more an argument that we need to increase the number of brackets in our corporate tax structure, not reduce our tax rate. Our current top bracket is set at $18Million in taxable income. Facebook in 2015 made $3.69Billion in profit and $17.93Billion on revenue. The Apple tax is fair. The tax avoidance by Apple by using a web of holding companies and subsidiaries is exactly why the EU commission and the U.S. Senate chose to investigate. At the end of the day, Apple dodged the rules across multiple national lines and are now paying for it. The Apple tax is that punishment.

Readers, did you know all about the history of the Apple avoidance? Do you agree with the Apple tax? Let me know in the comments below. Be sure to check out Cash Flow Celt on Facebook to get all the newest updates. If you’re looking for an easy way to reduce your monthly expenses, check out my review of Republic Wireless and slash your phone bill down to just $30 a month per line.

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I'm just a local business and finance nerd looking to help people get educated about small business, marketing, and personal finance! I write about anything and everything that I can tie into those themes. I'm also Central Florida's only Kilted Realtor, so I write about Real Estate too! Check out my About Me page to see the origins of Cash Flow Celt.

3 Responses

Thanks for the explanation! Before I read this, I was feeling like the EU penalty was fair. And I’m an Apple shareholder. It just feels like it’s fair for Apple to pay something.

But you’re also right that it’s not fair to penalize Apple after the fact, when Apple was acting within the bounds of the law. If the gov’t wanted Apple to pay, why not make it on a going-forward basis, instead of a retroactive penalty? I’m sure the answer is because they don’t want Apple to leave the country, but that’s not a good enough reason. We wouldn’t allow that here in the U.S.

Well, Apple should face higher effective taxes this year because they restructured in 2015 and lost those benefits. So, a going forward policy is moot. It’s an odd situation though, the EU is trying to increase Ireland’s bottom line – not penalize them. I think that’s why the EU feels they can do it retroactively. Because Ireland erred in their judgment of EU laws, so they failed to collect on taxes that were rightfully theirs.

Ireland didn’t err though. And they certainly had chances to in 2007 to fix fix the tax situation without any threat of Apple moving jobs. At that point Ireland is complicit in the tax avoidance scheme, but I’m not really sure how that should be handled. It’s a real humdinger.